Securities and Exchange Commission members indicated a willingness Thursday to overhaul the corporate shareholder-voting process, citing complexity that may confuse small investors as well as interest among both Democrats and Republicans in the operations of advisory firms.
The comments – made at the start of a roundtable on the matter – come as advisory firms that provide voting recommendations on CEO pay, diversity requirements, and other shareholder proposals face increasing scrutiny from lawmakers and criticism from corporate America, whose plans their recommendations sometimes oppose. On Wednesday, a bipartisan group of senators introduced legislation that would increase federal oversight of Institutional Shareholder Services and Glass Lewis, the top two advisory companies.
The current model “affords even a single investor a powerful voice,” but the involvement of broker dealers and other third-party emissaries “introduces further complexity into the already opaque system,” said Democratic Commissioner Kara Stein.
“Our current proxy regime is arcane at best,” she said during her opening remarks. “While this tangled web has helped to create a plethora of cottage industries, it has not necessarily helped to provide transparency to either the companies or their investors.”
Stein, referencing the new Senate legislation, labeled Thursday’s discussion as a “new start to a long-standing conference.” Fellow Democratic Commissioner Robert Jackson cited the bill as evidence there is a “bipartisan and clear path forward to address the issues raised.”
On the Republican side, Commissioner Hester Peirce highlighted potential conflicts of interest among fund-management firms that may invest on their own behalf while simultaneously making decisions regarding the holdings of smaller shareholders whose stock and money they manage.
“Sometimes, they’re acting in ways that look more consistent with their own preferences and not those of the funds,” she said during opening remarks. “Sometimes, we allow one or a small number of shareholders to act as an agent on behalf of other shareholders, and I think we need to examine whether that is the right thing to do.”
Peirce questioned whether new regulations can be put in place to “make sure the idiosyncratic preferences of one shareholder aren’t driving what companies do at the expense of other shareholders.”
Chairman Jay Clayton, meanwhile, said the agency’s efforts would focus on regulatory revisions that benefit everyday investors or “those who are putting, who have put $50, $100, $200 a month away for years and years.”
Among the items the SEC is set to examine is the minimum financial investment that shareholders must make to file a proposal directing actions by company boards. Currently, any person who holds at least $2,000 worth of stock can participate, but companies have long argued that the low threshold allows activist groups to push more politically-motivated measures without a significant capital investment.
While such proposals rarely garner the majority needed to pass, they have resulted in notable changes. One example is the decision to take the role of chairman away from then-Bank of America Chief Executive Officer Kenneth Lewis after his purchases of investment firm Merrill Lynch and high-risk lender Countrywide Financial in the run-up to the 2008 financial crisis forced the company to take government bailouts .
The SEC is also slated to discuss criticism that proxy advisers operate with little transparency into how they decide on their recommendations or what conflicts of interest they may have. ISS and Glass Lewis argue they have processes in place already to address such concerns and say any new regulatory actions or legislation are unnecessary.
“The extent of the errors is certainly over-sized and out-stated,” ISS General Counsel Steven Friedman told the Washington Examiner. “At the same time, where that does happen, we already have mechanisms in place.”
Ahead of the meeting, the U.S. Chamber of Commerce and the National Association of Manufacturers launched a six-figure ad campaign targeting the influential firms. ISS said the effort was driven by a desire to quiet critics of CEO pay, which can be in the millions of dollars, and halt discussion of other issues company executives don’t wish to address.
